Weighing Plans to Cut Gas Prices

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Jerry Taylor, a senior fellow at the Cato Institute, and economist Julianne Malveaux discuss the reasons behind the higher prices at the pump, and examine the benefits and drawbacks of plans to reduce the cost.

ED GORDON, host:

To help us better understand today's high gas prices and how the market works Farai also spoke with Julianne Malveaux - an economist and frequent roundtable participant on this program - and Jerry Taylor, a senior fellow at the Cato Institute. Taylor says asking oil companies to slash their prices just doesn't make sense.

Mr. JERRY TAYLOR (Senior fellow, the Cato Institute): Gasoline, like houses, are sold to the highest bidder. They're priced at what the market will bear. In gasoline markets, like in housing markets, they're sold by auction. Gasoline prices were established by spot markets around the country, and the price that your service station pays to get gasoline is tied to that spot market price, plus some business and transportation costs. Yeah, businesses could sell below spot market price, in which case they'd lose money and probably face shareholder lawsuits.

CHIDEYA: Jerry, let me ask you - transitioning to international issues - about a certain play by Hugo Chavez, the head of Venezuela's government. He gave some low cost heating oil to northern states this winter. Why haven't US companies -you know, particularly during the winter when this was a matter of life of death - done what some people would consider a public service use of their resources?

Mr. TAYLOR: Well, the job of business is to make money. You're not in business for generally any other reason, say, for making a profit. Hugo Chavez, because he has substantial control over the domestic industry there, can reallocate goods and services as he sees fit for political reasons. And so government can, of course, provide below cost commodities if they so desire. And Hugo Chavez saw a political opportunity to embarrass the Bush administration by doing so. But asking businesses to sell products at below market cost is asking businesses, essentially, to self-destruct. And no business is going to want to do that.

Dr. JULIANNE MALVEAUX (Economist): This is a simplistic sort of supply and demand model that Jerry's putting out here, saying that. I agree with him that a company's job is to profit maximize, but at the same time, companies like ExxonMobil and others live in a society where, essentially, they have some responsibility to the government and the people that have consistently subsidized them, and artificially inflated demand for their products over the years. Again, our highway system, I think, is something we might look at. The paucity of public transportation. What Hugo Chavez did, I think, was a heroic move. And yes, he was attempting - and he did very affectively - embarrass the Bush administration. But it wasn't also about embarrassing the administration, but also about making a point about availability of these supplies.

CHIDEYA: Let me just jump in and add that ExxonMobil made the largest profit of any company last year. So they're doing what businesses do well. And I wanted to transition you - and please fill in with whatever else you were going to say, Jerry - to the questions of gas taxes. You hear some pundits like Joe Kline(ph) saying, well, we should drop the payroll tax and increase the gas tax. And then other people laughing to his face, saying that Americans will never increase gas taxes. What about the government's role in depressing consumption by increasing the price of gas through taxes?

Mr. TAYLOR: Well, the Cato Institute has long argued that it would be far better to tax consumption rather than taxing income. So as a general matter, we'd be happy with the transition of the tax code, which looked towards taxing gasoline and oil and other commodities as opposed to taxing income and labor. I think that would be a positive step. In the specific issue of heating oil -which is what we were talking about - that's primarily a fuel source in the Northeast, in New England, not throughout most of the country. Most of the country and most households get their heating fuel from natural gas or electricity or something else.

I can't tell people what to do with their resources or their time or their money. But the fact is, nobody puts a gun to anyone's head and tells them to rely on heating oil to keep their house warm. If they've decided to do that, that's one thing. And, in fact, for the most part, you will save money more years than not by relying on heating oil as opposed to natural gas or electricity. But some years you won't. So there's nothing government needs to do for you here. If you can't do something for yourself…

Dr. MALVEAUX: It's not about government doing anything for you, Jerry. It's not about government. I think you've attempted to distort my argument. I think that what we're looking at is things like infrastructure. Things like people who don't have the flexibility, again, to convert. Of course Cato would say let's not tax gas. Let's tax consumption. But I don't think we'd want to waive a gas tax until we talked about how we're going to do some things around issues of conversion. Government incents what the want to incent. With a $70 billion tax cut last week, they attempted to incent private investment. Why can't we attempt to incent efficient energy use?

CHIDEYA: There's been a lot of debate about the CAFE standards, which are the fuel efficiency standards. What do you think, Jerry, is the federal government's responsibility to raise fuel efficiency standards for cars?

Mr. TAYLOR: I don't think the government should even have CAFE standards. For the most part, consumers will respond to high gasoline prices the way we might hope, which is to conserve on gasoline. We've seen that over the past couple of years now that sales of heavy SUVs have dropped like a rock. Not because government forced any regulations on the industry or punished consumers or raised gasoline taxes, but because gasoline prices have gone up, and the big heavy SUVs - which were attractive and we saw record gasoline prices in 1998 -are no longer attractive at all.

We've seen an increase of fuel efficiency in the auto fleet, and we've also seen a reduction in gasoline demand compared to 2003 to the present. We're actually consuming less gasoline than we consumed the year before and the year before that, and we'll continue to see improvement. So the idea that the government needs to step in and force people to conserve or to minimize how much gasoline they use, or to reconsider what kinds of cars they're buying -that might be an argument for when prices are very low. When gasoline is selling for $3 a gallon or more, people definitely do take that into consideration. Not only in the kind of cars they buy, but where they live, how often they're interested in taking mass transit, whether they car pool. In other words, high prices is the best friend for people who want conservation, and want to see different sort of commute patterns and that sort of thing.

CHIDEYA: Julianne.

Dr. MALVEAUX: You know, Farai, everyone does not have the fluidity to decide that they want to move because they want to move closer to their city or closer to the job because gas prices have gone up. It boggles my mind to think that there is no notion of the income skew that comes with the notion of let's just deal with prices. You've got face costs and variable costs, so yes, someone buying a car today probably would look at a hybrid SUV, would look at something other than your traditional SUV. A single mom with four kids is going to go to the used car lot and get what she can.

I do think that government can do more. I think that certainly with the CAFE standards, the government has dropped the ball. Private business can be incented both by the market, and that's - Cato always says just let the market work. Well, the market works, but it works imperfectly, and some people end up with a greater burden from the market. So government can help the market work by imposing some of these standards. I think this will be a great time to re-engage Detroit, especially as the auto industry is flagging into talk about some standards, and to talk about alternatives.

CHIDEYA: All right. Thank you both so much. We've learned a lot.

Dr. MALVEAUX: Thank you, Farai.

Mr. TAYLOR: Thank you.

GORDON: That was NPR's Farai Chideya. She was joined by Jerry Taylor - a senior fellow at the Cato Institute - and Julianne Malveaux, an economist, author, and president and CEO of Last Word Productions.

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